Covered Calls

[wayneL]

hi

can you write CC on the index? can you explain to me how i would do it? i have $10,000 which i would like to start CC on the Index (ASX200).

thanks

Just write a put... same thing. Same risk, same reward.

 

[clayton4115]

so i would write puts on the XJO? would i get any income from it?

 

[wayneL]

so i would write puts on the XJO? would i get any income from it?

You can't "buy" the index so you can't do CC's anyway. Well you can synthetically, but no point in that.

You would have to find an index ETF or index future that has options. Not sure if these are available in Oz... but plenty in overseas markets.

But do yourself a favour and do a search on "synthetics" on this site and Gooogle. Oh bugger it here is the link https://www.aussiestockforums.com/forums/showthread.php?t=11127

A CC is simply a synthetic short put.

Yes you get the same income from from the short put as the CC (presuming same strike is used), but you are still exposed to the identical downside risks that you are with a CC.

Effectively, IT'S THE SAME THING.

 

[wayneL]

You can't "buy" the index so you can't do CC's anyway. Well you can synthetically, but no point in that....

A CC is simply a synthetic short put.

Effectively, IT'S THE SAME THING.

OK, just because I can't sleep and I'm bored, lets create a covered call on the index (synthetically).

Let's presume the XJO is trading at 3000, which it will be at some point in the future....

We can't actually buy the index, but we can create a synthetic long index position with options:

Buy 1 x XJO 3000 call
Sell 1 x XJO 3000 put of the same expiry

This is called a synthetic long and will be just like buy the index with two small differences.

1/ There will be an expiry date
2/ You will pay the cost of carry up front.

Now for the covered call. For this example I am going to use the ATM (3000) call of the same expiry as the synthetic long. The reason is for a further illustration of synthetics will become obvious shortly:

Sell 1 x XJO 3000 call

So the entire position becomes:

Buy 1 x XJO 3000 call
Sell 1 x XJO 3000 put of the same expiry
Sell 1 x XJO 3000 call of the same expiry

Voila; an index covered call.

But wait! We are buying and selling the exact same call and they cancel each other out.

This leaves only one option position remaining: The written 3000 put.

So I hope that illustrates the synthetics of this position.

 

[mtsaustralia]

In my experience covered calls are O.K, but you get hit too hard when the stock gets in a downturn.

I.e; you have 100k account, and you write cc for 6 months. If you have 5 positions, and average a 2% profit over those 6 months (which would be doing well with some loosers), then the market gets hit by 10% (like last Aug or Dec/Jan) you loose all your profits and more.

A MUCH better strategy is to use a protected buy write strategy using portfolio margin leverage, and do it with single stock futures.

Eg:

Buy SSF XYZ for $30
Buy approx 12 months put for XYZ at 30 strike
Start writing near month OTM calls.

Using PM leverage, your risk on this trade is the cost of the puts. Which, if written OTM, as the stock goes up can usually be covered in 2-3 months. Then you can write OTM calls (and roll if goes up too much) with zero capital risk.

I do this strategy and make approximately 100-200% per year on the winners, and loose a max of 50% on the losers. I usually get about 4 winners to every 1 looser... even in this market.

The reason i do it with single stock futures is that when using PM, there is no cost to holding the futures (with IB), due to there being no risk due to put protection.

Matt

 

[wayneL]

In my experience covered calls are O.K, but you get hit too hard when the stock gets in a downturn.

I.e; you have 100k account, and you write cc for 6 months. If you have 5 positions, and average a 2% profit over those 6 months (which would be doing well with some loosers), then the market gets hit by 10% (like last Aug or Dec/Jan) you loose all your profits and more.

A MUCH better strategy is to use a protected buy write strategy using portfolio margin leverage, and do it with single stock futures.

Eg:

Buy SSF XYZ for $30
Buy approx 12 months put for XYZ at 30 strike
Start writing near month OTM calls.

Using PM leverage, your risk on this trade is the cost of the puts. Which, if written OTM, as the stock goes up can usually be covered in 2-3 months. Then you can write OTM calls (and roll if goes up too much) with zero capital risk.

I do this strategy and make approximately 100-200% per year on the winners, and loose a max of 50% on the losers. I usually get about 4 winners to every 1 looser... even in this market.

The reason i do it with single stock futures is that when using PM, there is no cost to holding the futures (with IB), due to there being no risk due to put protection.

Matt

Matt,

Good points re margin and PM, but a couple of questions for you:

1/ Why buy ATM put and OTM call? You are relying more on the long delta to deliver your profit and you shed profit if it goes too far past the strike. yes you can roll, but a decent gap up and this has cost you money.

Why not OTM put and ATM call?

2/ What is the 100%-200% profit calculated on? Can you substantiate this figure with a worked example.

3/ What % profit on capital and across your portfolio are you achieving?

4:1 winners to losers when your structure relies on delta seems a bit incredible to me without another twist. Thems bull market figures. Is that over the year or over each expiry cycle.

Thanks

 

[BradK]

OK, just because I can't sleep and I'm bored, lets create a covered call on the index (synthetically).

Let's presume the XJO is trading at 3000, which it will be at some point in the future....

Wayne,

A word spoken in jest....

 

[jeffish]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years. The premiums on options seem crappy for so long now I have my other trading account on hold.

I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!

Using a SMSF I really wanted to minimise my risk and I had to follow my SMSF charter for ATO compliance reasons too!

As a result I have been trading what seems like a cross between monopoly and papertrading!

I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.

One trade I did last month was to:
First buy NCM Dec 20.00 put for .80 when it was trading at about $23.
Buy 1000 or 1 contract at $20.00 when the price pulled back
Sold Nov 24.00 call at .94 close to expiry and maximise my profit
Profit $4,140 (minus brokerage)

Now I still have a December 2008 20.00 put worth about .20. In anticipation of NCM pulling back in the next 6 weeks or so I just bought a Jan 09 put for .80 to repeat the process all over again, as my view is that gold (and in fact the whole market) will be volatile over the next month or so.

I have been trading this way for the past 3 months and have over 100 k which is about 15% or 60% pa. I could probably only do this in this market so I am open to new strategies!

What amazes me is the amount of people who hold stock and do make their money work for them- even using covered calls as you point out is not the best strategy.

Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?

please excuse my naivity if all this is old 'news'. I am a plodder.

Jeffish

 

[cutz]

Hi Jeffish,

My impression of a covered call is buy the stock and sell the call with no put protection, and it’s generally viewed as put on the trade then wait for assignment.

I started out with options towards the tail end of the last bull market writing calls against my existing portfolio without follow up strategies. My plan was if I got assigned I could buy back the stock or write a put, I quickly discovered that this was an s*** strategy for obvious reasons.

 

[BradK]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years. The premiums on options seem crappy for so long now I have my other trading account on hold.

I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!

Using a SMSF I really wanted to minimise my risk and I had to follow my SMSF charter for ATO compliance reasons too!

As a result I have been trading what seems like a cross between monopoly and papertrading!

I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.

One trade I did last month was to:
First buy NCM Dec 20.00 put for .80 when it was trading at about $23.
Buy 1000 or 1 contract at $20.00 when the price pulled back
Sold Nov 24.00 call at .94 close to expiry and maximise my profit
Profit $4,140 (minus brokerage)

Now I still have a December 2008 20.00 put worth about .20. In anticipation of NCM pulling back in the next 6 weeks or so I just bought a Jan 09 put for .80 to repeat the process all over again, as my view is that gold (and in fact the whole market) will be volatile over the next month or so.

I have been trading this way for the past 3 months and have over 100 k which is about 15% or 60% pa. I could probably only do this in this market so I am open to new strategies!

What amazes me is the amount of people who hold stock and do make their money work for them- even using covered calls as you point out is not the best strategy.

Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?

please excuse my naivity if all this is old 'news'. I am a plodder.

Jeffish

Not to be a wet blanket, but two words: Beginners luck. The worst kind of luck. Watch out mate.

Hope you make a killing. A friend once said you need a $5000 education - either pay for it, or the market will take $5000 from you. Either way, you get your education.

Brad

 

[mazzatelli1000]

Hi there,
I am a newby-been trading covered calls with a collar since September with my SMSF of 86K.

Before this September I was trading options (bull put and bull call spreads and a couple of other strategies) on the ASX to mixed success for just 2 years.

Little did you know the covered call + collar is actually a synthetic bull spread
SO before and after September you have been trading the same risk profile.

The difference is primarily in management

The stock + short call = synthetic short put
Then you buy a lower strike put

So this is very much akin to you bull put spread, and of course this can also be created using calls

I just want to share that I am glad to have got my money off the stinking, filthy, dirty, greasy fund managers and into the market myself where I can protect my nest egg and even turn it into a profit!

Good but now be very very cautios otherwise you'll lose it

I have been fortunate enough to have been trading in this volatile market when I have the money to own the stock and buy and sell as the market moves while still protecting my stock with puts. My strategy is basically to buy stock and ATM put protection (a collar you call it) and then set our 'sell' order at 20% profit. (when I don't have time to daytrade and watch the market closely.

As mentioned this is a synthetic bull spread - so your outlook in the market is currently bullish???
ATM put protection in this environment means you'll be spewing some excessive premium for your hedged downside

Please make a distinction for me:
By 'covered calls' do you mean you have not bought put protection on stock but you are writing the call on the underlying stock? If so, this seems risky as their is a big downside risk for a minimal gain. What do you reckon?

Yes a covered call is just a synthetic short put - no downside protection

I do congratulate you on your success so far!!!

Do some more research ---- its dangerous times.... since the Black Swan has tended to turn up more frequently this year

 

[sails]

Little did you know the covered call + collar is actually a synthetic bull spread
SO before and after September you have been trading the same risk profile.

The difference is primarily in management

The stock + short call = synthetic short put
Then you buy a lower strike put

So this is very much akin to you bull put spread, and of course this can also be created using calls


Good but now be very very cautios otherwise you'll lose it



As mentioned this is a synthetic bull spread - so your outlook in the market is currently bullish???

ATM put protection in this environment means you'll be spewing some excessive premium for your hedged downside...

There is a technical difference between the collar and a bull call spread - cost of carry (interest) is prepaid in the long call whereas it is usually calculated daily on the stock even if on margin lending.

If the stock tanks and the stock position is closed, interest will cease on any margin component and any other proceeds from the sale would then attract interest in the bank account. However, there is some risk of losing the prepaid cost of carry in the long call if the market moves down causing that long call to be FOTM...

PS - also falling interest rates would hurt the long call if it was purchased when IRs were higher.

 

[wayneL]

PS - also falling interest rates would hurt the long call if it was purchased when IRs were higher.

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0.

 

[mazzatelli1000]

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0.

I wonder what it would be like to trade options say in Argentina or Brazil and having to deal with Rho extensively

 

[sails]

"Rho"

A Greek we've had the luxury of ignoring for a few years. Another one to consider these days.

**Wonders if cost of carry will become an extinct concept for a while as our lunatic governments drive interest rates to 0.

Cost of carry is something I realised was fairly relevant to writing covered calls especially if using margin loans - which was being heavily promoted a get-rich-quick-scheme few years ago when I first got into options.

The sold call only has the risk free rate factored into it, however cost of carry (interest) on the margin lending component was around 2-3% higher than the risk free rate. Bad enough having the stock at market risk without being on the back foot with interest as well.

However, as we all know options are a trade off. If we replace the stock with a long call, we are effectively pre-paying the cost of carry (interest) for the duration of that long call. If the markets tank, there is a risk of losing the cost of carry in the long call. However, if the stock position is closed out, we have only paid interest to the day it is closed.

Food for thought...

 

[mazzatelli1000]

Cost of carry is something I realised was fairly relevant to writing covered calls especially if using margin loans - which was being heavily promoted a get-rich-quick-scheme few years ago when I first got into options.

The sold call only has the risk free rate factored into it, however cost of carry (interest) on the margin lending component was around 2-3% higher than the risk free rate. Bad enough having the stock at market risk without being on the back foot with interest as well.

However, as we all know options are a trade off. If we replace the stock with a long call, we are effectively pre-paying the cost of carry (interest) for the duration of that long call. If the markets tank, there is a risk of losing the cost of carry in the long call. However, if the stock position is closed out, we have only paid interest to the day it is closed.

Food for thought...

I say this goes into the gotcha thread!!